T/F Flashcards
Both interest and dividends PAID by a corporation are deductible operating expenses, hence they decrease the firm’s taxes.
FALSE; Both interest and dividends paid by a corporation are deductible financing expenses, hence they decrease the firm’s taxes.
The INVENTORY TURNOVER RATIO and days sales outstanding are two ratios that are used to assess how effectively a firm is managing its current assets.
TRUE
The basic earning power ratio (BEP) reflects the earning power of a firm’s assets AFTER giving consideration to financial leverage and tax effects.
FALSE; before
BEP uses EBIT or Earnings Before Interest and Taxes which does not yet consider or take into account the amount of interest expense (financial leverage) and tax the firm has in its earnings.
The statement of cash flows has FOUR main sections, one each for operating, investing, and financing activities, and one that shows a summary of the cash and cash equivalents at the end of the year.
TRUE
The DAY SALES OUTSTANDING can be used to determine how long it takes, on average, to collect payment after a sale is made. The DSO can be compared with the firm’s credit terms to get an idea of whether customers are paying on time.
TRUE
Profitability Ratios show the combined effects of liquidity, asset management, and debt management on a firm’s OPERATING RESULTS.
TRUE
Other things held constant, the higher a firm’s debt ratio, the HIGHER its TIE will be.
FALSE; lower
Debt Ratio is total debt/total assets
TIE or Times Interest Expense is operating profits/interest expense
Interest expense increases when there’s more debt → the denominator in TIE increases, hence the lower its TIE will be
Determining whether a firm’s financial position is improving or deteriorating requires analyzing more than the ratios for a given year. TREND ANALYSIS is one method of examining changes in a firm’s performance over time.
TRUE
